How to Calculate Yield to Worst

How to Calculate Yield to Worst
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Yield-to-worst calculations apply only to callable bonds, which are bonds with multiple call dates. Yield-to-worst is simply the call date with the lowest anticipated yield. Calculating yield-to-worst involves repeating yield-to-maturity calculations for each call date. However, yield-to-worst cannot accurately predict the total return on your investment because interest rates change every year. If you reinvest your yearly interest at a new rate, you need new calculations to predict the return on future call dates.

Note the price you paid for the bond, including what percentage of its face value you paid and how many years remain until the bond's maturity date.

Write down and set aside all call dates for a callable bond.

Assume, for the sake of explanation, that interest rates will remain the same. For every year that remains before the maturity date, divide the anticipated yearly interest payment by the amount of money you paid for the bond multiplied by 100. This calculation represents the percentage of interest you will earn for each year and call date. If you plan to reinvest the interest every year, calculate a new yearly interest payment every year. Mark which years are call dates and note the anticipated interest percentages.

Subtract the amount you paid for the bond from its face value to determine the anticipated face-value earnings, which will be identical for each call date or the maturity date. Divide these earnings by the bond's face value and then multiply by 100.

Combine the face-value percentage with the interest percentage for each call date. Search for the call date with the lowest total percentage, which is the yield-to-worst date.